Sonic Corporation (NASDAQ:SONC) seems to be on solid footing in 2013. The company announced earnings a couple days ago. It has a lot of growth potential when compared to other restaurants.
Earnings and investment thesis
The company has been able to increase its earnings per share by 17% on an adjusted basis. This helps to justify the relatively high earnings multiple. The stock currently trades at a 21.8 earnings multiple. The company has been increasing spending on a national TV promotion strategy. This strategy is aimed at improving brand awareness in markets Sonic Corporation (NASDAQ:SONC) has little to no presence in. That way, it encourages franchisees to open up a Sonic in new markets.
Currently Sonic Corporation (NASDAQ:SONC) is most dominant in the lower half of the Eastern corridor of the United States. The company is currently building out its presence in the Northeastern corridor of the United States, along with the West Coast. The West Coast of the United States presents the most opportunity for growth due to the sheer size of the driving population and the size of the economy. California alone represents $2 trillion in GDP output, with 23 million citizens with drivers licenses. In the state of California, Sonic only operates 60 drive-ins.
The company was able to improve its profit margins by 70 basis points for drive-ins. It was able to return cash to shareholders holders with a $35.5 million share repurchase, and has decreased the amount of debt on the balance sheet by $20 million. The company’s growth seems to be on track as Sonic Corporation (NASDAQ:SONC) has opened 450 new drive-ins over the past five years.
The company grew its earnings-per-share figure to $0.26 in the second quarter of 2013 from the $0.24 figure it reported in the year-ago period. Analysts on a consensus basis anticipate the company to grow earnings by 15.1% on average over the next five years.
Darden Restaurants a value driven alternative
Darden Restaurants, Inc. (NYSE:DRI) had a bit of difficulty with growing earnings in its most recent quarter as the company was more heavily focused on increasing its store sales through the use of in-store promotions. This is in stark contrast to Sonic’s national ad-driven promotion strategy. Of the two, the television advertising strategy seemed to have been more effective. Sonic Corporation (NASDAQ:SONC) was able to grow its bottom line and same-store sales at the same time. Comparatively, Darden Restaurants reported a 14% increase in expenses, which resulted in an 11.7% decline on earnings.
Investors should consider investing into Darden Restaurants, Inc. (NYSE:DRI) because while the promotion strategy was costly over the short term, it may increase same-store sales because it will expose customers to a high-end dining experience. Most are familiar with the company’s brands but aren’t exactly certain of the dining experience. So the company could have done the right thing by promoting Olive Garden and Red Lobster the way it did.
Investors should consider investing into the stock because it has already pulled back by 15.3% from its one-year high. This implies that the stock has already priced in the effects of missing on earnings. The stock pays out a 4.5% dividend yield, perhaps one of the highest dividends yields I have seen in the industry. The stock is projected to grow earnings by 7% on average over the next five years. Analysts will change their outward looking forecasts once the management team demonstrates that it can grow earnings once its promotional strategy ends.
McDonald’s winning hearts
McDonald’s Corporation (NYSE:MCD) is heavily focused on improving its earnings through improving the dine-in experience. The company now displays the amount of calories each meal carries, increased the selection of products it sells through McCafe, and has even changed the packaging of its products. Recently, I bought a Sausage Egg McGriddle and on the top of the bun was an embedded “M” emblem for McDonald’s Corporation (NYSE:MCD).
The company is doing its best to improve the dine-in-experience from its restaurant locations, and was able to grow U.S. comparable-store sales by 2.4%. The growth happened without the use of a deep-discount-promotional strategy that Darden Restaurants, Inc. (NYSE:DRI) used. This is great for shareholders because its means that the profit margins are likely to remain healthy.
The company currently compensates its investors with a 3.6% dividend yield. Analysts on a consensus basis anticipate the company to grow earnings by 8.6% on average over the next five years. The growth in earnings is likely to be sustained using a mix of cost-cutting, same-store-sales growth, franchise openings, and share buybacks. The stock trades at an 18.1 earnings multiple, which is reasonable when considering the consistent rate of earnings growth the company has been able to accomplish.
Conclusion
Sonic Corporation (NASDAQ:SONC) has the most growth potential of the aforementioned companies, but if investors want to add a bit of value then they should also consider Darden Restaurants, Inc. (NYSE:DRI). Of the three, McDonald’s Corporation (NYSE:MCD) is the best-in-breed as the company offers the best mix of growth, value, and income.
Alexander Cho has no position in any stocks mentioned. The Motley Fool recommends McDonald’s Corporation (NYSE:MCD). The Motley Fool owns shares of Darden Restaurants, Inc. (NYSE:DRI) and McDonald’s Corporation (NYSE:MCD).
The article Sonic, McDonald’s, or Red Lobster? originally appeared on Fool.com.
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